More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
“A bipartisan bill now moving through Congress could prevent losses from fraud in the future by giving financial advisors a mandate to regulate themselves,” Spencer Bachus writes in a Wall Street Journal opinion piece on Monday.
Bachus, R-Ala., chairman of the House Committee on Financial Services, then slams federal regulators “whose job is to enforce the law and protect investors from bad actors,” saying they “often had no clue or took no notice of what was going on right under their noses until it was too late.”
“Bernie Madoff. Matthew Hutcheson. Mark Spangler. If these names don't ring a bell, you are lucky,” he writes. “Reports indicate that thousands of investors lost billions in savings—in some cases an entire lifetime's worth—investing with these financial planners, investment advisors or ‘retirement coaches’ who were accused of breaking the law and taking their money.”
Bachus notes that while average American investors may not fully understand the different titles that investment professionals use, they assume there is government oversight protecting their savings from fraud.
“When you contract with a licensed broker-dealer to buy and sell stocks or commodities, there is a reasonable level of oversight, as broker-dealers face examinations of the accounts they manage on a regular and consistent basis.”
But the average investment advisor—who isn't registered as a broker and thus doesn't buy or sell stock—can expect to be examined only once a decade, he notes.
“Even worse, the Securities and Exchange Commission reports that almost 40% of investment advisors have never been examined, or audited, meaning more Madoff-type Ponzi schemes could be afoot, and no one will know until investors are harmed.”
He then touts legislation he’s introduced with Rep. Carolyn McCarthy, D.-N.Y., called the Investment Adviser Oversight Act, to increase the frequency of examinations for retail investment advisors. The bill authorizes the establishment of one or more self-regulatory organizations (SROs) to supplement the SEC's ability to examine investment advisors.
“Understandably, many investment advisors are not excited about increased oversight, so their lobbying organizations have come out against our bipartisan bill. But whenever fraud occurs and investors are harmed, outrage, bewilderment and astonishment follows and members of Congress—and the public—then ask, 'Why is no one enforcing the law?' Our bill will make sure the law is enforced."
He concludes by noting that opponents of the bill recently offered a proposal that investment advisors be required to pay a fee to the SEC that would be used to increase the number of exams. But the SEC has informed Congress that even if it received increased funding this year, it would be able to examine only one in 10 investment advisors annually—something Bachus calls “unacceptable.”